Ex-Expatriate who was living in Muscat, Oman, Middle East for too long, but still blogs about the place.
Biased and usually irreverent opinions on life and business goings on in The Sultanate of Oman, a quiet and beautiful country bordering the Indian Ocean.

Thursday, October 11, 2007

The tax laws in Oman are heavily biased toward local companies. A pure foreign company has to pay 32% company tax, whereas a local affiliate, or a fully local company, only pays 12%. This is a serious difference. The catch however, is that only Omanis can register a local company or affiliate.

So, all foreign affiliates [or expat workers] here have to have a person called ‘a sponsor’. Some Omani – actually pretty much any omani adult – who’s willing to act as your local sponsor. And you get an instant tax discount of ~66%.

Naturally, all foreign companies take advantage of this. And then question is: who do they want as a sponsor? Obviously, someone who can add value to the 5 – 10% they’ll have kick back to them for the privilege. Maybe even someone who can supply some of the things you’ll need easily, like Indian workers, a bank loan for working capital, premises, legal support, and business contacts.

This was and still is a key loophole the merchant families exploit to extend their reach into businesses across the board in Oman. It was also a perfect way to employ the rapidly accumulating numbers of sons, cousins, sons-in-law, and eventually their children too, getting them involved in business, without risking any capital and getting them nice paying jobs too.

Even better of course, if the sponsor [or their Dad, or Uncle say] are ‘connected’ to the sources of all the major cash in Oman that a foreign company wants to be a part of, ie the Government, especially a department with lots of projects going or lots of things they need to buy.

There is obviously nothing whatsoever illegal about this. Somebody has to be the sponsor, after all, it’s the law. And if the tender process is all above board, no problem.

Ministers and other senior officials are not allowed to be on the board of public companies, or companies that are tendering for Government contracts. But there doesn’t seem to be any law whatsoever against people very close to senior Government members being a sponsor to a private company.

But I’m also not sure this law has been extended to tenders associated with private companies, even where a significant participant is Oman Oil Company, a wholly Government owned investment vehicle in the upstream and downstream oil and gas business and acknowledged incubator of big projects, like Sohar Aluminum, but not actually a formal part of the Government itself.

None of this is strictly a problem either. The problem is that there is no public scrutiny of these dealings. To find the names of company sponsors, you have to physically go the register of companies and look. And it is trivial to have a chain of such companies interlinked, like YYY Holdings, SSS Trading, etc etc, and figuring out who the actual owners and sponsors are is not easy. They might even be a sub-contractor, or a sub-sub contractor to the actual winning company. Very very difficult to track, even for the State Audit Office [who do seem very very honest, by the way].

Plus, no newspaper in Oman is going to point out that the son of Minister X’s brother is sponsor of a company that just won an Oman Oil contract for $XXX. Or not that I’ve ever seen. And as they would not be able to prove anything illegal, even reporting it would itself be potentially illegal [see earlier post].

What I do know is that at the Government departments I deal with, the first question of the list of big foreign companies bidding for a tender is not how good they are, but ‘Who’s their sponsor?’…

How does history relate to Corruption?Essentially, you have to realise that in 1970 the ‘country’ of Oman was essentially non-existent, fragmented along tribal lines and with no true central government, few businesses, and beset by rebels from Yemen and feisty people in the mountains & interior. Oman had no real infrastructure at all, and a population of mainly uneducated peasants fishing and raising goats and dates. The old Sultan was a little crazy, especially following an assassination attempt in 1966, and had a vision that seemed to involve keeping his people as backward and ignorant as possible. That changed radically when his majesty Sultan Qaboos took over in a coup, deposing his father.

Now, the new Sultan had HIS vision – a prosperous, educated, modern country that was wealthy and happy and sustainable for the future. But how could he achieve that? He had hardly any resources, some land and a little money from the oil.

After suppressing the rebellions, with the help of the British Airforce and Army and the Iranian Army plus his considerable skills as a Diplomat in applying the carrot and the stick, one of the first things he did was call upon the Omani disapora, many of whom had made their money in the old Omani Empire in the estates of Zanzibar and East Africa, or in trading businesses in the Gulf States and between Oman and India. As a result they had been able to educate their children abroad, plus they had both capital and expertise in running businesses. The Sultan asked them to return to help rebuild the place.

Many did. As a result, and as large amounts of cash started to flow from the Governments coffers, Oman gained an instant and wealthy ‘Elite’, who were naturally rewarded for their loyalty and assistance with land [one of few things the Sultan had to give], opportunities, and Government funded contracts. These people brought money and expertise, and built the country as we know it today. Of course, somebody had to build the roads, the hospitals, the military bases, the houses, the ports and the schools, and they also had a right to make a profit doing so. This boost also assisted the existing Merchants close to the Royal Family. This is how Oman gained now famous Zawawi’s, Zubair’s, Al Sultan, Al Yahya, and Al Araimi.

Plus, the assistance his Majesty received from key people in the military and Palace during the battle with forces loyal to the old man also deserved and received rewards of privilege, for example positions in the Government, more land, and contracts financed by the oil that was just starting to flow. Some names from this group are the Al Wahaibi’s, and Shanfari’s. A few of the big families from the restful interior had to be placated too, such as the Al Harthy’s…

But the legacy of those understandable decisions remains. Especially in a small and relatively poor country, being rich and well connected tends to create opportunities to make more and more money. It happens everywhere. It’s the power of economies of scale.

And it’s no surprise it happened here too. So, keep that in mind. Some especially younger Omanis might not like it that all the money and the businesses seem concentrated in the same hands, but its really only thanks to the old guard that they even have a country to begin with, let alone one where they can go shopping in air conditioned malls and eat fast food.

So, Oman Business Tip no. 1: Get in earlyGet in a country at the entry level, by securing a monopoly for a desired import, or starting a local company in construction. Secure contracts with the Government to build things [like roads], or run things [like ports]. Get a friendly banker. Or even better, start a bank. Staff your business with bright hard working people from India who’ll do what they’re told and not cost too much, and perhaps employ the sons and daughters of those in Government.

Such private companies will tend to get bigger. They get more import monopolies, like those for cars, car parts [especially lucrative], luxury goods, in fact, almost anything imported, and as a result make lots of cash quite legally. They also have ready access to capital through loans, because they are big enough to make banks comfortable or have implicit Government support, and they often own the banks anyway.

Some of those original companies are still private, some now public. For most of the companies below the range of activities and daughter companies is simply breath-taking. I’ll post more about the daughter companies later.

I hereby attest and confirm that is the absolute intent and undeflectable aim of this blog to at all times be in total compliance with the laws of the Sultanate of Oman. Any perception that this is not the case is due to an incorrect and inaccurate interpretation of the contents of this blog.

Really.

Its critical that this blog be interpreted in the true spirit of what it called 'The English sense of humour', irony, tongue in cheek, a nod's a good as a wink to a blind man, etc etc. It's a good job Monty Python and the Jon Stewart Show were/are not bound by the contraints of the law below...

Clearly the Western intellegence services should be investing far, far more heavily in Muslim comedians. A large part of the Arab population really could do with a lot more satire, jokes, and learning to laugh at themselves.

Oman – The country of good newsThose who live in Oman will know that there is certainly NOT a free press of any description here. The main newspapers are owned and controlled by establishment figures and are very, very strong on selfcensorship - nothing gets reported at all that might possibly be construed as questioning Government or the establishment figures, no real crime reports, no court reports, no effective questioning of anything important. The Omani papers make the UAE and Bahrain papers seem agressive and open. Really, its that bad.

The only hope for Oman is the internet, you'd think. But wait.

Internet use in Oman is regulated by Omantel’s Terms & Conditions, which mandate that users “not carry out any unlawful activities which contradict the social, cultural, political, religious or economical values of the Sultanate of Oman or could cause harm to any third party …. Any abuse and misuse of the Internet Services through e-mail or news or by any other means shall result in the termination of the subscription and may result in the proceedings of Criminal or Civil lawsuits against the Customer.”

To use the Internet, individuals, companies, and institutions are asked to sign an agreement not to publish anything that destabilizes the state; insults or criticizes the head of state or the royal family; questions trust in the justice of the government; creates hatred toward the government or any ethnicity or religion; promotes religious extremism, pornography, or violence; promotes any religious or political system that contradicts the state's system; or insults other states. Users must also agree not to promote illegal goods or prescription drugs over the Internet.

Omantel imposes additional physical restrictions on Internet access in Internet cafés. Individuals or companies wishing to open an Internet café must submit a floor plan for the proposed site. The plan must be designed so that the computer screens are visible to the floor supervisor. No closed rooms or curtains are allowed that might obstruct view of the monitors.22 Moreover, Internet café operators are asked to install proxy servers to monitor and log user activity.

Sunday, October 7, 2007

As with the other Gulf States, Oman remains fixed to the dollar. With more than 70% of its exports still from Oil and gas, and with the international prices for these commodities still determined in dollars, this makes sense. Oman committed to pegHamood Sangour Al Zadjali, the Executive President of the Central Bank of Oman, has re-iterated that the sultanate is 'firmly committed' to maintaining its peg to the US dollar, despite repeated rumours of possible revaluations by some Gulf states, reported Reuters. Al Zadjali said the peg to the greenback provided 'the strongest source of stability' and was a key factor in attracting trade and investment.Oman: Monday, October 01 - 2007 at 07:57

However, it is giving Oman some problems. Consumer price inflation officially is now at 6% p.a., and many people feel it is way way higher, especially if you include the horrendous rent increases lately - sometimes more than 75%. The economy is effectively over-heating badly.

Oman's inflation nears 6%Oman's annual inflation rate reached almost 6% in July, up sizeably on the 5.6% rate recorded in June, reported Reuters citing Ministry of National Economy data. The consumer price index reached 111.6 points up from 105.3 points in the same month last year. An 11.3% increase in the cost of food, beverages and tobacco in July, coupled with an 8.5% lift in rents, have been blamed for the rise in inflation.Oman: Sunday, September 16 - 2007 at 06:50

Wednesday, October 3, 2007

It is common knowledge in the Sultanate and the region that Oman is ‘short of gas’. Given that Oman has always had relatively limited gas resources, this isn’t too surprising. Right now, for example, Oman is running its LNG refineries well under capacity, despite good LNG spot markets, because they do not have enough gas.

The actions from the Ministry of Oil and Gas to stimulate gas supply recently [see the article below] are designed to try to get more of the marginal gas out of ground without risking the Government’s money to do so, because these gas fields are neither easy nor cheap to produce. I think it’s a great idea to get External Oil Companies, like BG and BP, to risk their money to produce these gas fields and allow the Government to avoid any risk. However, to do that, they have to allow the companies to make a profit if it works, and it’s likely the price will have to be more than $2/mscf.

But, what has made matters worse for Oman are the deals done over the past few years by the Ministries of Commerce and Economy to create the ‘gas based industries’ in Salalah and Sohar. To get these projects off the ground they have commited to sell gas at incredibly cheap prices, often not even allowing for inflation. To put it into context, a gas price of $0.85/Mscf – the value apparently a lot of the Sohar industries got - is equivalent to an oil price of just $5/barrel.

$5 a barrel. No wonder it makes sense to ship Aluminum Oxide in from India, turn it into Aluminum, and ship it out. And often that price has been fixed. No link to oil price. Not even inflation. Wow. What a deal.

This is gas that the country could have sold elsewhere [as LNG] for much higher returns, or could have used in a few years time to produce electricity or desalinate water. Or used right now to make cement. And it is also going to cost Oman a lot more than $0.85 per Mscf to produce gas from these marginal fields.

OK, the Oman economy needs industry to make jobs for Omanis, and to sell things other than just hydrocarbons. The Sohar developments are stimulating a whole region of the country. So maybe it is worthwhile to spend some of the large amounts of money Oman is making on the LNG by subsidising the Sohar industries with below cost gas. Not that that argument is made explicit to the people.

Still, it would be interesting to know who the shareholders are that are benefiting from this give-away price of gas, wouldn’t it? More on that to come folks…Next post: A primer on Omani Corruption.

Oman considers its gas options.The Omani Ministry of Oil and Gas is considering how to best promote gas exploration and development in its onshore acreage, and help address its looming gas deficit. It is considering plans to offer at least five more blocks for exploration and appraisal by international operators, following the success of similar awards to BG and BP in 2006. If the plans are implemented, successful bidders will have the right to explore and develop some of Oman’s most gas-prospective acreage, under Exploration and Production Sharing Contracts.

Until recently, PDO was wholly responsible for exploring, producing and supplying gas on behalf of the government. In 2006, major gas fields discovered by PDO – Abu Butabul and Khazzan-Makarem - were awarded to BG and BP. This new licensing initiative is still in the planning stage but it is considered that new partners will re-vitalise gas exploration and development, and support PDO’s efforts to address the country’s gas shortfall. It would also allow PDO to focus on implementing its many conventional and enhanced oil recovery projects, to stem the decline in Oman’s oil production. Although the block areas have yet to be defined, the opportunity to explore and develop gas resources in some of Oman’s more prospective areas would attract the attention of many international companies.

Most of the areas on offer have been extensively studied by PDO, which has been successfully exploiting gas resources in Oman since the late 1970s. PDO’s efforts have intensified since 2001, when it embarked on a five year gas exploration programme. A significant volume of reserves were added, following a strategy which focused on the most promising targets and by implication, current and future prospects are likely to be more subtle and potentially lower reservoir quality.

Given the technical challenges, the fiscal terms and pricing policy on offer will need to offer the prospect of commercial projects. This will only be achieved if producers can sell the gas to the government at a price considerably above historical levels. There is no gas price benchmark in Oman, although prices have been underpinned by gas sales agreements signed with major industrial projects in the early 2000s. Gas was sold on long term contracts for approximately US$0.85/mcf.

Oman urgently requires new sources of gas, but this new initiative is unlikely to deliver significant new production before 2013. Incremental supplies from Qatar and possible imports from Iran are also unlikely before 2012.

This latest initiative may be too little too late, and in the short-term, the Sultanate will remain dependent on PDO, BP and BG to deliver gas to maintain economic growth.>>>>>>>

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About Me

I used to be an Expatriate working for the Government in Oman as a consultant. Other than that I can't be too specific! But even though I've left, I love the country, its people and many aspects of its culture. I have the deepest respect and admiration for the Sultan of Oman and his clear vision for his country. Email contact: undercover(dot)dragon(at)gmail(dot)com There is also a Muscat Confidential Facebook Fan page - Join now!!

Disclaimer

It is the absolute intent and undeflectable aim of this blog to at all times be in total compliance with the laws of the Sultanate of Oman. Any perception that this is not the case is due to an incorrect and inaccurate interpretation of the contents of this blog. It is intended for Adults with a sense of humour and intelligence - if you do not meet this criteria, go and read something else.